Whales Turning: 2008 Regime Wins Again

For now, there is no regime change to inflation. The 10-year/2-year interest rate ratio has reversed. Charts only tell us current trend, not the future. It's possible this is a fakeout before the breakout, but if not...I won't say gold has topped yet, but gold will have topped as long as this chart is going down and/or until the market remonetizes gold. My bias is towards shorting commodities, not gold, as the former have a far greater downside if the yield curve flattens.

For background on the 10yr/2yr ratio, I looked at this chart before in Waiting For Regime Change and August 2011 inverted: Here Comes the Rate Shock and YCC.

If this turn in the chart is sustained, not only will inflation be transitory, but I'll probably be discussing Chinese yuan devluation within twelve months. At which point the central banks lose control and the U.S. dollar has its Moonshot, or we do another round of inflation.

As for timing, the Fed started doing repo in September 2019, only nine months after the Fed threw in the towel on rate hikes. The market was teetering by February 2020 even without coronavirus. Cycles should accelerate into the end game, thus I don't expect it'll be too long before markets start blowing up. This feels a bit like 2008 given how many people are all in on inflation trades and certain that there's no risk of deflation (crashing commodity prices).

More stimulus and Fed intervention are the obvious catalysts for a bear market short-circuit, but two things on my mind. One, higher prices have turned consumers off. Buying intentions for appliances and homes are below the pandemic low of March 2020. Intervention that raises prices could kill the economy, at which point it's not clear which way things shake out because a deflationary crash is better for banks. The Fed can prevent bank failures from deflation. It can't save bank valuations from stagflation. Two, will Congress pass a stimulus? It is likely there would be calls for more stimulus, but unclear what a rapidly-approaching-lame-duck-status Baizuo administration can get passed. Finally, consider it all in context of markets. Speculators (nearly everyone now) assume more intervention is coming. It is priced in. The market could price it out, then back in (correction). Or the market is wrong, and prices go far lower than would be considered a credible forecast today.

I'm not fully positioned for this yet. Bears have been blown out at every hint of a shift in market sentiment. This time I expect there will be more of a pullback, but whether it's the start of an honest to God bear market, something that hasn't happened since 2008, I cannot say. Whatever is coming, more specualtive assets such as Bitcoin should lead the way lower. Until Bitcoin breaks $30,000, it's possible this is simply a fakeout. The S&P 500 Index lost its 50-day moving average late on Friday though...and not to strain too hard, but the chart looks similar to early 2020 with a gap lower followed by a new all-time high that quickly gives way to selling...

UPdate: Adding more charts. Here's the copper-gold ratio and 10-year yield, highlighting why I'm not as bearish on gold.